Regulation by prosecution
47.The recent report issued by the Treasury Select Committee entitled '... Fixing LIBOR: some preliminary findings...' contains very little that those of us who have long been concerned about the criminal state of the British banking sector did not already know.
48.One of the key findings of the report deals with the relationship between the various regulatory agencies of the State, and the way in which they dealt with the emergence of incriminating details about the LIBOR affair.
49.What this report demonstrates so clearly is the lack of willingness for the FSA to adopt its powers to prosecute financial crime, and the very narrow interpretation they placed upon their function. This reflects earlier findings concerning the attitude of the regulator towards its prosecutorial role uncovered in its earlier days.
51.'...The Committee is concerned that the FSA was two years behind the US regulatory authorities in initiating its formal LIBOR investigations and that this delay has contributed to the perceived weakness of London in regulating financial markets...'
52.This failure to respond effectively to the early information about Barclays is reflected upon critically by the Committee, as it identifies the likelihood that this evidence may have led to evidence of other wrongdoing elsewhere in the wider market.
53.'...Barclays may well not be alone. Nor is it likely to be a London-based phenomenon. The FSA is continuing to investigate the conduct of seven other banks in relation to LIBOR— some of them non-UK based banks. The FSA’s regulatory counterparts in several other countries are also conducting their own investigations. Barclays is just one of many international banks under investigation for possible market manipulation. It is important that Barclays’ serious shortcomings should not be seen in isolation from the possible actions of other banks and we await the results of ongoing investigations...'
54.This is a classic scenario which identifies the sheer 'shamateurism' of most British regulatory actions. It is manifested by the failure to be able to read the signs of crime and appreciate the fuller ramifications of their implications. Thus it is that the regulators tend to focus on simply that evidence which is immediately in front of them, and without seeking to extrapolate from the initial facts what else might be happening in the wider market context.
55.The Committee do not lay the blame entirely on the shoulders of the FSA, they also contribute serious criticism on the actions of Barclays and their Compliance function.
56.'...It is important to state that Barclays’ internal compliance department was told three times about concerns over LIBOR fixing during the period under consideration and it appears that these warnings were not passed to senior management within the bank. Statements that everything possible was done after the information came to light must be considered against a background of serious failures of the compliance function within the bank. In other words, the senior management should have known earlier and acted earlier...'
57.This is a damning indictment of the compliance function within Barclays, but it comes as no surprise to anyone who has any experience of this particular criminal enterprise. Compliance Officers were not encouraged to develop pro-active lines of disclosure, nor were they encouraged to think out of the box. They were largely an army of box tickers, but it is even more concerning to note that there did not appear to be any form of channel of communication to escalate these concerns.
58. Every compliance and money laundering 'best practice' manual will talk glibly of the need for a direct channel of communication between the head of compliance and the Chief Executive. They talk of the need for unfettered communication in a discreet and secure manner. How was it therefore that the news of these criminal manipulations were not brought to Bob Diamond's attention at the earliest possible opportunity. What was standing in the way of the desired state of direct communication?
59.Clearly, there was a culture inside Barclays of 'No bad news please', or 'No surprises'. The compliance department clearly knew what every compliance officer who stays in post for more than a few months knows, they knew what questions to ask and what questions not to ask, and when to go deaf, dumb and blind!
60.A major part of the report deals with the FSA's failings to take strong executive action when financial criminality is discovered. It is as if the FSA has taken a deliberately blinkered view of their powers and has refused to look beyond and outside their most immediate remit. This is very disappointing because it has been hoped that the FSA would begin to take a more robust approach towards its powers to prosecute financial crime, after the introduction of the FSMA in 2000.
61.Financial practitioners do not fear regulatory fines, mostly because they are not individually called upon to pay them. The burden always falls on the shoulders of the shareholders, many of whom, if the Standard Chartered Bank case is anything to go by, will not even blame the Executives of the bank for landing them in this mess in the first place. Regulatory findings will always find fellow practitioners who are willing to sympathise with them. Public scandal can be difficult to handle, but rarely does an executive get forced from office. He may quietly resign at a later stage, but he does so with a well-padded pension fund and other benefits to cushion his existence.
62.This whole issue of the suitability of punishment for serious wrong-doing has been a critical element of the longer-term failures of the FSA to bring a robust approach to the regulation of the UK financial market. Ultimately, it is prosecution for crime which the financial practitioner truly fears, but if the market knows that the regulator is deliberately avoiding adopting its prosecutorial role, then this will lead to a realisation that the regulator has no real teeth!
63.It has always been one of the greatest ironies of the whole regulatory conundrum that criminalisation for simple offences of ordinary 'crime' is one of the greatest fears of the Executives of the financial sector.
64.Ironically, it is not necessarily the sentence which is passed which is of the most importance, the true fear of the financial practitioner is of the verdict of 'guilty' being publicly pronounced in open court. Such a verdict immediately takes away the sense of being a 'protected species' which too many banksters have believed they possessed for too long.
65.A criminal conviction places them on a par with other ordinary criminals, people who under any other circumstances they would go out of their way to avoid like the plague. The fact of conviction now puts them in the same 'criminal class' category and it spells social and commercial death for any city practitioner who has been so convicted. It is the ultimate exclusionary weapon of social and reputational mass destruction.
66.So powerful is the impact of criminalisation that even those who had once called the convicted man a friend find it very difficult to continue to see him, even in a private social context. As for any further dealings with him on a commercial context, such a thought would never enter their heads. He is now entirely beyond the pale, and he can never be received again inside the magic circle.
67.This may be what makes it so difficult for regulators to bring such a powerful weapon to bear on those whom they perceive may come from the same class and socio-economic background as themselves! They won't admit this of course, and they tend instead to use the excuse that financial crime cases are too difficult to get convicted, that juries do not understand them, although that has never been my experience.
68.This was one of the major problems about the predecessor of the FSA, the Securities and Investments Board, who absolutely refused to contemplate prosecuting any financial practitioner for crime.
69.In 1999, I was invited to conduct a review of financial services regulation for the UK Treasury. Among other people I interviewed was a senior staffer from the SIB who would be moving into the new FSA. I asked him about the powers to prosecute possessed by the new regulatory agency.
70.'... the official concerned was more forthcoming. He agreed that the FSA would become responsible for a far greater degree of responsibility for prosecution in a number of areas, including money laundering issues, but felt that this predicated the need for a further regulatory interface. He said;
71.“…There is an anxiety about the new criminal functions which we are being tasked to accept…various elements such as insider dealing, market manipulation, etc, all tend to colour our internal philosophy towards the question of conducting prosecutions…you really should understand, because of the difficulties associated with obtaining convictions in the criminal courts, there is no unswerving acceptance of the need for wholesale prosecution powers…”
72.This answer was given in such an open way, in contrast to so many other answers which he gave, that he was invited to state why he was so sure that this was the case. His answer was studiously revealing, and must be considered to contain a huge degree of truth. He said;
73.“…Because, frankly, Howard Davies has no intention of ending up with the sort of reputation which so bedevilled the SFO in its early days. He refuses to be tarred with the same brush as Barbara Mills or George Staple…”
74.The Treasury Select Committee has clearly identified that this mentality still exists within the regulatory environment. They state;
75.'...The FSA apparently believes that its fees are not raised for the purpose of prosecuting offences other than those set out in FSMA. The Committee is concerned by this. The FSA has responsibility for regulating the key participants in financial markets. The FSA’s decision whether to initiate a criminal prosecution should not be influenced by the fact that its income is derived from firms which it regulates. The FSA has an obligation under section 2(1)(b) of FSMA to discharge its functions in the way in which it considers most appropriate for the purpose of meeting its regulatory objectives.
76.Under section 2(2)(d) the reduction of financial crime is one of these objectives. Financial crime is defined in section 6(3) as including not only misconduct in relation to a financial market but also any criminal offence of fraud or dishonesty. The FSA took a narrow view of its power to initiate criminal proceedings for fraudulent conduct in this case. The Committee recommends that the Government, following the Wheatley review, should consider clarifying the scope of the FSA’s, and its successors’, power to initiate criminal proceedings where there is serious fraudulent conduct in the context of the financial markets.
77.That this state of affairs still exists after all these years is a matter of deep concern and the Committee rightly urges direct reforms of this state of affairs.
78.'...The Committee urges the Wheatley review to consider the case for amending the present law by widening the meaning of market abuse to include the manipulation, or attempted manipulation, of the LIBOR rate and other survey rates. They should also consider the case for widening the definition of the criminal offence in section 397 of FSMA to include a course of conduct which involves the intention or reckless manipulation of LIBOR and other survey rates...'
79.Again, the Committee saw fit to criticise the length of time taken by the SFO to open an investigation and demands that a new relationship be forged between the two agencies. There is no reason why that FSA and the SFO could not and should not operate in tandem when conducting investigations, so that if, as it seems, the FSA is unhappy to mount prosecutions, then the SFO can adopt this mantle.
80.'...The Serious Fraud Office (SFO) is now conducting a criminal investigation into LIBOR. The Committee was surprised that neither the FSA nor the SFO saw fit to initiate a criminal investigation until after the FSA had imposed a financial penalty on Barclays.
81.The evidence in this case suggests that a formal and comprehensive framework needs to be put in place by the two authorities to ensure effective relations in the investigation of serious fraud in financial markets. The lead authority must be clearly identified for the purposes of an investigation, and formal minutes of meetings between the authorities must be maintained. We recommend that the Wheatley review examine whether there is a legislative gap between the responsibility of the FSA and the SFO to initiate a criminal investigation in a case of serious fraud committed in relation to the financial markets...'
82.Quite rightly, the Committee's report makes reference to the issue of public anger against that banks in the UK. They are right so to do. The British public is sick and tired of watching their financial affairs being raped and pillaged by the criminal banking sector. They have lost any sense of trust in the banking sector, trust which is vital for the effective running of the market. A report today by Currencies.co.uk discloses that 62% of British citizens have lost trust in the banks. The Committee knows that this state of affairs is very dangerous for uk plc, and they call for some focused thinking on behalf of the banking sector.
83.'...The findings have focussed pre-existing public anger with banks. Barclays is one of many instititutions that have contributed to the state of banking’s reputation. LIBOR has followed the vast public bailouts of banks during the financial crisis, the liquidity support and guarantees given to all banks and the apparent lack of penalties for those who contributed to that crisis, most of whom retained very high levels of remuneration even after 2008. More recently there has been the scandal of payment protection insurance (PPI) mis-selling, criticism of banks’ perceived reluctance to lend, complaints about the sale of unsuitable and complex interest rate swap products to businesses (which are under investigation by the FSA), and serious IT failures at RBS Group. The economy needs well functioning banks. They will have a crucial role in any economic recovery through their lending to businesses and households. An end to crude ‘banker bashing’ would be highly desirable, but bankers must recognise that they have brought much of this upon themselves through actions which have seriously damaged public confidence. While banks continue to provide evidence that wrongdoing persists the popular mood is likely to remain hostile...'
84.For myself, I believe that the issue has gone too far, and the genie is out of the bottle. The only way these organised criminal enterprises can be dismantled is for a root and branch reform of the banking sector, breaking up the big conglomerates, jailing a lot of 'too big to jail' bankers, and reintroducing an environment where banks become the servants of the community and the economy, and not high-rollers in the most unregulated casino on the planet.
85.So, this Commission is an excellent opportunity for Government to take a close look at the way in which the financial sector is policed, because unless something drastic is done to change the way in which the financial sector is regulated, then we shall continue to suffer from the kind of scandals that have made London a cess-pit, the venue of first resort for every con-man, scam-artist and bankster in the world, rapidly ensuring our descent into the ranks of the global pariah states.